Star Income Stocks (purple stars) are Stock Doctor’s high-quality income-producing businesses that suit investors who seek sustainable and attractive dividend yields over the long term.
Star Income Stocks (SIS) are generally more mature businesses and defensive in nature since they prefer to payout profits to shareholders in the form of dividends rather than invest profits for future business growth and expansion opportunities.
For Star Income Stocks, it is vital that companies demonstrate sustainable and dependable dividends via a history of consistent dividend payments, cashflow margins above dividend payments, and a stable dividend outlook.
SIS’s must pass Golden Rule 1 Financial Health (two consecutive reporting periods of Strong or Satisfactory Financial Health rating), Golden Rule 2 Past Financial Performance (from an income perspective) and Golden Rule 3 Outlook and Active Risks.
New Star Income Stocks may be added to the list after each interim and annual reporting period provided they satisfy Lincoln’s benchmark criteria for Golden Rules 1, 2 and 3, which are outlined in more detail below. The criteria aims to identify companies that are currently financially healthy, have a track record of defensive dividend payments and are expected to pay an above-market yield moving forward that is sustainable.
Golden Rule 1: Financial Health
The first and most important rule in the Stock Doctor quantitative bottom-up stock selection framework. The Financial Health score is derived using proprietary algorithms that analyse companies financial accounts and calculate industry-specific profit, debt, asset, equity and cash flow ratios. Ultimately, the Financial Health score is a powerful screening mechanism that enables investors to confidently focus their attention on financially healthy businesses and avoid potential disasters.
To meet this criterion a stock must exhibit Strong or Satisfactory Financial Health ratings. A company must be healthy for at least two consecutive periods or more. It is not sufficient for a stock to be healthy for solely one period.
Golden Rule 2: Past Financial Performance
When combined with Financial Health, past financial performance is an essential quantitative barometer to help further measure the true fundamental quality and investment potential of growth and income stocks.
For income stocks, we focus on the lower half of the table. It is paramount that companies demonstrate sustainable and dependable dividends via a history of consistent dividend payments, cashflow margins above dividend payments, and a stable dividend outlook.
The sector-specific income factors we assess include: Operating Cashflow Per Share (OCFPS), Free Cashflow (FCF), Earnings Per Share (EPS), Dividends Per Share Growth (DPSG), Dividend Payout Ratio (DPR) and Dividend Yield (DY)
The purple star status in the Star Income Criteria denotes that it has met Golden Rule 2 from an income perspective.
Golden Rule 3: Outlook
At Lincoln, we want to gauge whether a company's earnings are sustainable, enabling it to continue to pay above-market dividend yields into the future and therefore remain as a Star Income Stock in the upcoming financial periods.
To determine whether a company can maintain its Past Financial Performance (Golden Rule 2), a qualitative analysis of the company, its outlook, and specific active risks are required.
The analysts at Lincoln Indicators constantly monitor the Outlook and Active Risks of Star Stocks to ensure that they are investment grade.
The analysts will investigate trends in earnings revisions, its competitive landscape, directors trading activity, currency & commodity risk, management remuneration, trends in short selling, and regulatory & geopolitical risks. To do so, the analysts will scrutinise consensus forecasts, speak to company management, attend investor briefings, analyse broker research and monitor sector trends.
At Lincoln, our analysts do not model forecasts earnings, rather, we look at identifying the active risks that could materially change the growth expectations of a company relative to their consensus forecasts.
A company can be removed as a Star Income Stock by our Analysts at any time if it is felt the company is not likely to continue to pay an above-market yield in the future. This could be due to a negative announcement that will affect the company's ability to continue to meet Lincoln’s benchmark criteria in the future or a sustained run-in share price that has effectively reduced the current yield significantly. A company may also lose its Star Income Stock status when its annual or interim financial results are analysed.
We will always validate our decision within the Analyst Commentary which can be accessed via the 9 Golden Rules screen or the Analyst Comments icon.
It is important to note that Star Income Stocks may include companies that are either current Star Growth Stocks or Borderline Star Growth Stocks. However, this is not a requirement for a company to be considered a Star Income Stock.
If you would like to discuss a company’s Star Income Stock status, members can contact our Research team via email at email@example.com or speak to the team directly on 1300 676 333.